BBVA CEO urges Turkey return to 'market-based economy' amid central bank changes

Turkey's government and central bank must deliver on recent moves to reinstate market-based principles to the management of the country's economy, Banco Bilbao Vizcaya Argentaria SA CEO Onur Genç said during a second-quarter earnings call.

Turkey is BBVA's third-largest market after Spain and Mexico. The country's economy is experiencing runaway inflation, having persisted with an unorthodox monetary policy that saw Turkey's central bank cut interest rates further as prices rose sharply.

Since the reelection in May of President Recep Tayyip Erdoğan, who had appointed a string of central bank governors to help fuel his high-growth economic strategy, the government has moved to quell spiraling inflation. Shortly after returning to office, Erdoğan appointed a new central bank governor, Hafize Gaye Erkan, who has hiked interest rates by 1,100 basis points to 17.5% since June.

"We do hope that Turkey finds the solution in re-establishing a market-based economy," said Genç, who is Turkish.

"Turkey wants to prioritize growth investments, employment — which we like — but you have to do it at a gradual pace, and you have to do it without getting away from a market-based economy," Genç added.

Turkey business delivers higher profit

BBVA's Turkey business, which it owns through an 86% stake in Turkish lender Turkiye Garanti Bankasi A.S., posted €525 million in profit in the first six months of 2023, company filings data shows.

The half-year result surpassed full-year figures for 2022, when BBVA had to introduce hyperinflationary accounting for its Turkish business as inflation in the country surpassed 80%.

The depreciation of the Turkish lira in recent years due to inflationary pressures has diluted the value of profits generated by Garanti for BBVA.

Garanti has struggled to reach its former heights amid the challenging economic climate. The Turkish bank contributed a record €2.15 billion in pretax profit for BBVA in 2017, according to S&P Global Market Intelligence.

BBVA has repeatedly defended its presence in Turkey as the returns from Garanti have diminished. The Spanish banking giant even increased its stake in the Turkish bank in 2022, spending €1.41 billion to do so.

"Turkey has a great potential, but there are some macro fragilities," Genç said. "We think that the new economic administration are confronting these challenges right up front and, in that sense, it's a positive trajectory."

NII drives group profit growth

BBVA reported a profit of €2.03 billion in the second quarter driven by a 37.5% year-on-year increase in net interest income to €5.77 billion. Net interest income is the difference between interest revenues and interest income.

The second-quarter result was the first time BBVA exceeded €2 billion in quarterly profits, Genç said.

Positive repricing of loan books in Spain and Mexico encouraged BBVA to confirm its guidance for NII growth to almost 20%, CFO Rafael Salinas said.

"These trends make us much more confident about our NII guidance to grow at high teens, even close to 20% in 2023," Salinas said.